How USAI Weaves a Strategic Web


While much of the e-commerce sector has found it tough to achieve profitability, USA Interactive (USAI) has soared. The conglomerate built by TV and movie mogul Barry Diller owns some of the biggest brands online. They include travel leader Expedia.com (EXPE), dating heavyweight Match.com, and hotel-booking ace Hotels.com (ROOM). Diller has wowed Wall Street with an astute acquisition strategy and his vision for melding online and offline into an integrated whole (see BW Online, 2/12/03, "More Gold in Diller's Midas Touch?").

Unlike most outfits that have boasted the wonders of synergy, USAI has delivered. It posted free cash flow of $545 million in 2002 on net revenues of $4.6 billion. That not only tops most dot-coms but also a handful of more established cable outfits. BusinessWeek Online Technology Editor Alex Salkever chatted with USA Interactive Chief Financial Officer Dara Khosrowshahi on Feb. 11. Here are edited excerpts of the conversation:

Q: In the last investor briefing, Barry Diller indicated that he might look at buying into another market sector. Why?

A: We're a broad play in the online-commerce area. We think there are some skill sets and some advantages we can bring into new areas. And that's not exclusive of getting deeper where we are. But we do see opportunities.

Q: What areas might interest him?

A: We've looked at [online] classified [ads], financial services, and we've looked at real estate, to name a few.

Q: What's the common thread?

A: In all those businesses the Web can serve as a good intermediary between supply and demand. That's what we do best. We're good at aggregating consumer demand, acquiring customers, and bringing that to suppliers. We get the margin as part of that equation. We don't want to be a supplier. We don't want to own hotels or planes. We don't want to own concert venues. We want to be the ones who bring you to the airlines, the concerts, and hotels.

Q: Some of the rumors have USAI buying Google, Overture (OVER), Cruise.com, MovieFone, and Overstock.com. Any comment on this speculation?

A: I can't comment.

Q: What makes you interested in a specific acquisition?

A: Financially, it has to make sense. But more than that, it has to allow us to really change the game in some way to get a big upside return. A perfect example is Interval. When we bought it, Interval was an offline timeshare-exchange business. We think that by taking that online, we can radically change the economics of the business and also offer our clients something great they don't have today.

Q: I hear more and more about Yahoo! (YHOO) becoming a competitor to USAI. How do you compete against a big Web portal like that with such broad reach?

A: We're not like Yahoo!. We get to ally with other portals and use them as distributors. We're also able to build our own brand, such as Expedia and Match.com, and distribute directly at the same time. We deal with America Online (AOL) and other big aggregators, and we have our own brand identity. Right now, that's a pretty comfortable position. If that changes, we might look at buying a portal or an aggregator.

Q: There have been some concerns about the complicated capital structure of USAI. Are you streamlining it to make it more palatable to investors?

A: We've organized the company into three groups going forward. Instead of looking at 10 or 20 distinct companies, investors can look at three branches: Electronic retailing, information and services, and travel services. We've also brought in Ticketmaster completely so we could simplify our holding in that company. We hope to resolve the holding we have in Vivendi Universal Entertainment.

We have no present plans right now to buy the rest of Expedia and Hotel.com. But from a long-term perspective, we hope to eventually simplify our majority ownership stakes by taking full ownership. Down the line, we will be a much simpler company.

Q: A group of hotel chains is forming their own e-commerce site to sell discount rooms. How would this affect USAI subsidiaries Expedia and Hotels.com?

A: The hotel-booking business is such an enormous market that it's only natural for competitors to show up in the online space with us. Internationally, the market for hotel rooms is $400 billion. And USAI has less than 2% of that market. While there will be competitors, the market is so rich and big that we can keep growing really without worrying about it.

Look at the air-travel arena and Orbitz. People said Orbitz would hurt us because it would give airlines the upper hand. It hasn't, and if you compare the hotel area to the airline area, the cartel that formed Orbitz accounts for a much higher percentage of overall air-traffic volume than the group that's creating this set of hotel industry e-commerce sites. Because the hotel market is so much more fragmented, we think an industry-backed player will have a lot less power.

Q: Paid online personals are getting pretty competitive right now between USAI's Match.com, Yahoo! Personals, and others. When does growth start to plateau in that space?

A: We think there's a good two to three years of runway there. It's so much of an improvement over alternative means -- newspapers, personals, whatever. The opportunity for someone to find the exact match, the perfect person, online tools bring so much to that formula that we think we're at the start of the growth curve. There's a lot of competition out there, but we're advantaged because we're big enough that we can put real marketing dollars to work.

So we hope that in two to three years, we can be the brand in online dating. We already compete quite effectively. We're much larger than anyone else. And we aren't limited like Yahoo! -- because they're a portal they can't get third-party distribution deals like we have. We're allied with AOL, with MSN [the online service owned by Microsoft (MSFT)], and we get to market our own brand both online and with an extensive TV-advertising plan. No one else has that combination.

Q: What obstacles do you face right now?

A: I can't really think of any. Execute, execute, execute. We really have the wind at our backs. There's no company out there trying to do exactly what we're doing. The returns are too good for it to be open forever, so we think we have a one- or two-year window to execute and secure a position that will be unique.

We have plenty of capital to invest, and we see lots of opportunity out there. We're pretty bullish on the future.


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